The Affiliate Ad Taxes: Why You Should Care

Yesterday, the Amazon.com affiliate program terminated all Colorado affiliates from its program. Amazon had previously carried out similar affiliate terminations in other states including New York. Why? Affiliate Tax laws. Today Nickycakes is going to talk about what these tax laws are, why you should care, what is being done about it, and how you can get involved.

What are Affiliate Taxes?

Please note, Nickycakes is far from a lawyer. Sometimes legal stuff is a little difficult to decipher. If any of this is wrong, you should be doing your own research anyway.

“Affiliate Tax” legislation refers to laws introduced in recent years in many states that attempt to require businesses operating outside of that state to charge sales tax to customers from that state if they have affiliates in that state advertising for them. Huh? Ok, so, Amazon being the obvious example, doesn’t charge sales tax for states they don’t physically operate in. If you are in New York, you don’t need to pay sales tax on books ordered from Amazon.com. Simple. Well, New York would LOVE to get a piece of the sales tax action from Amazon, so they passed a law in January 2008 that said Amazon, and other merchants operating outside of NY, to collect sales tax from customers in NY if they had affiliates advertising for them in the state. Seems like a slam-dunk for NY, right?

- Legality

So, can they really do this? Well, it depends. Obviously states can make and pass laws, but there has been some question as to the constitutionality of the affiliate tax laws:

Quill Corp. v. North Dakota

In 1992, the US Supreme Court ruled in a case between Quill, an office supply retailer, and North Dakota, who was trying to charge them use tax (use tax is kinda like sales tax but for services) because they had a “physical presence” in the state because their product ordering system was given to their North Dakota customers on floppy disk. Apparently North Dakota though that having software on a floppy disk in North Dakota qualified as a physical presence, and wanted to charge them “use tax” because the 24 tons of Quill product catalogs sent to their North Dakota customers had to be disposed of by the state. The North Dakota supreme court ruled against Quill, somehow, which was later overturned by the the US Supreme Court. The US Supreme Court said that in order to establish “nexus” (a fancy word for physical presence in the state), Quill needed to have offices, branches, employees, warehouses, etc. inside the state. They also noted, and this is important, that imposing such taxes on out-of-state businesses would be a huge burden on interstate commerce, because merchants would be required to keep track of the individual tax laws for thousands (over 6000 currently) of different tax jurisdictions.

Amazon.com v. New York

In May 2008, Amazon sued the state of NY over the recently imposed sales tax laws. They claimed that there was no “substantial nexus” because the affiliates in NY were never employees or contractors of the company. They ALSO said that if they were required to pay sales tax because they were paying people in NY to advertise their products, then OFFLINE retailers would need to pay similar taxes if they paid magazines and newspapers in NY to print ads for their companies. There is also the huge concern that they would be paying sales taxes even though they see zero benefit from the use of those tax dollars (taxation without representation). The case was dismissed by the NY State Supreme Court in January 2009. Amazon has since appealed, and their case was heard by the NY State Court of Appeals in November, and have been waiting since then for a decision.

What’s This Mean for Affiliates?

So how does this impact affiliate marketers? Well, after the state of NY imposed the tax, Amazon immediately removed ALL New York affiliates from their program. It makes sense for them to do so, because one of the main draws for Amazon customers is the lack of sales tax. Not only would they lose customers if they had to pay these taxes, but they’d also have to go through a prohibitively expensive process of keeping track of tax laws for different areas. So they just cut everyone off. So now, not only does NY not get any sales tax revenue from Amazon, but they get less income tax revenue from the affiliates who were previously making money in their state. It is clear that the lack of sales tax requirement is much more valuable to Amazon than the business generated by affiliates (and rightly so!)

But it didn’t stop in NY. Several other states have enacted such laws and had Amazon drop them from their program. You can see a basic map of the affiliate tax laws imposed so far, courtesy of Commission Junction, below:

So this is obviously starting to affect more and more states. The most notable being California, which currently has such legislation being debated.

And things don’t stop with Amazon, either. These laws apply to ANY online merchant with affiliates in affected states. The two main problems, as stated above in the Quill case, are the taxes themselves (plus the whole taxation without representation thing), and the prospective nightmare of retailers having to keep track of all the individual tax laws. It’s much easier for, say, a mom+pop online retailer to cut off affiliates rather than have to stay current on 50 states worth of tax law and frequently update their billing accordingly. Take, for example, online retailer Drs. Foster and Smith, a very popular pet supply retailer. They yanked their affiliate program about a month ago, not because they didn’t want to pay sales tax, but because they just couldn’t keep up with all the individual state law changes. Just a note: this is a pretty obvious case of hindering interstate commerce, which the SCOTUS was trying to specifically avoid in their Quill v. ND decision.

As you can see on the map above, Colorado is listed as having the legislation “Defeated”, but yesterday Amazon terminated all Colorado affiliates. Why? Well, the bill actually passed, but due to the efforts of many affiliates speaking up and attending sessions and speaking up, they were able to get the State Senate to rework the bill so it wouldn’t require Amazon to pay sales tax in the state just for having affiliates there. Unfortunately, they left in some stuff in the bill that WOULD require Amazon and its associated stores, to do extra stuff like inform Colorado customers that they were supposed to be paying sales tax, even if it wasn’t legally required, or something of that nature, so Amazon still shut down all their affiliates apparently due to the extra hassle this would create for everyone. Again, the state loses income tax revenue, the affiliate loses a job, and Amazon is relatively unaffected.

So, yes, you should care, because this could affect you. Even if you live in a state where a similar law was overturned, because the law can be re-introduced even after it is defeated. In Maryland, for example, an affiliate tax law was defeated last year, and was just recently re-submitted.

What is Being Done?

Luckily for affiliates everywhere, many companies have many dollars invested in affiliate marketing, and don’t like having their many dollars threatened. The Performance Marketing Association was formed a couple years ago to help keep people informed about affiliate marketing in general, to help connect people in the industry, and to generally make affiliates look good, and they’ve been doing a pretty great job. PMA has organized “grassroots” campaigns to get these affiliate taxes shot down by speaking with state government officials and organizing affiliates and others in the industry to show up at hearings and be heard. Rebecca Madigan from PMA was kind enough to provide most of the information in this post, and they are definitely the most informed when it comes to this issue. They have set up google groups for the individual states in which there is upcoming affiliate tax legislation in order to properly organize a defense.

What Can You Do?

Well, the Performance Marketing Association makes it easy to get involved if there is legislation being proposed in your state. There are several ways to not only be informed of new developments in affiliate ad taxes, but to help get the taxes shut down. Remember, state lawmakers are influenced a great deal by REAL people who are affected by the laws they make. If they see that a law they are proposing is affecting a real person, especially putting small business owners out of business, it matters…a LOT. Here are some links to get started if you’re interested in staying up-to-date or helping out:

Currently if you live in Maryland, the latest battle has just begun as a new affiliate ad tax was just proposed. Now is the time to get on board, join the maryland google group and get started fighting Maryland SB 824. They use google groups for this because the associations who are in favor of the affiliate tax also like to send people to the hearings, and if the information is public, they will use it to try to bring more counter-support.

Hmm, I guess I wasn’t clear enough on how the tax works. Amazon isn’t located in NY, but they have affiliates in NY so NY says that these affiliates are part of their company and that amazon must start charging sales tax to NY customers.

Yeah but per Savage's comment Nicky – while they're cutting ties w/ the NY affiliate in your example, if you were an affiliate either as a sole proprietor or LLC/Corp in NYC why wouldn't you simply create a new entity in Nevada or another clean state and move everything over. Amazon is now no longer dealing with someone residing in NY and you personally the NY resident is simply employed by a Nevada Corporation.

Problem solved no?

I agree this is going to slaughter the little guys, and the likes of shareasale/cj/linkshare will certainly have their business hurt. But i don't see why that workaround doesn't fly.

Yes, that solution works for the affiliates. Some of them don’t even have business set up and do this as a hobby. Some would rather not go through the time and money it costs to incorporate in another state.

There are more sides to it than this as well. The states gain nothing by making these laws, in fact, they lose money they’d be collecting as income taxes, which ends up hurting everyone in the state.

The problem here lies with “Nexus.” I had a client who sold TV’s online and wanted to setup a new business in Nevada rather than California to avoid sales tax and would hopefully allow him to offer competitive pricing. A tax attorney advised that it would be a tough sell since he had other businesses as well as his primary residence in California claiming dominate Nexus. If you are willing to do all the leg work, you still might be in a legal grey area so be careful.

Great post on the issue. So many affiliates live in their own little worlds but if we all don’t wake up and act on this we will see more and more states passing these laws and more companies shutting down their affiliate programs in those states.

this new idea of states rights to regulate interstate commerce on the internet is quite controversial. in the past/currently it has been the federal governments right to regulate these types of transactions. obviously the internet has been a huge gamechanger for commerce. the forefathers of this nation could not have foreseen this type of technological advances. The law is slow to catch up to changes in technology, commerce and society. Case in point being the use of the flog/rebill business model.

Does the internet really change/create the nexus for a company in a particular state with the use of an affiliate? I dont think so. It will be interesting to see which way the State of NY Court of Appeals rules on the case. Its a grey area of the constitution. It could very well end up in the Supreme Court.

At some point i do see the federal government stepping in and regulating as the internet grows. it will be an issue at the state level currently as it is now but i think eventually the budget deficit will bring the feds out to the money grab. its a complicated issue and its hard to say where it will go. this is a great article and definitely helps to make affiliates more aware of the issues at hand.

we had a tax come up in Hawaii. we were lucky and the governor Linda Lingle vetoed the bill. not to say it wont come up again. i wrote several posts about it in my blog but i let the domain name expire. when i get a chance i'll get the domain back and get my blog live again. i'll post some links to the information about the hawaii affiliate tax. there is a chance it might come up again in the future.

We Colorado affiliates thought we were in the clear with Amazon because the internet tax bill they passed did not mention the "affiliate nexus" or the word "affiliates" at all. Sure surprised me as it did most of us. Ya know what? These people have been sleeping for 12 years while we were all building our affiliate businesses – now some bozo in Vermont called us the "underground economy" – many lawmakers and retail organizations are still sleeping – they all need to WAKE UP and start selling to out of state customers with their websites to make up for the economy problems – Man I never sleep – now I have to take all those Amazon links down and create thousands of Squidoo lenses and sell Amazon anyway

Good writeup Nick. This is a ridiculous attempt by the various failing state economies to try and milk some extra cash out of a would be easy target. Deval Patrick (Massachusetts Governer) has been trying to do similar things. A lot of people on the border of MA and New Hampshire travel to NH to purchase big ticket items to avoid MA’s 6.25% sales tax. Gov Patrick attempted to strike a deal with NH stores requiring that MA residents get charged sales tax when purchasing items in NH. Just crazy attempts by our government to try and squeeze every penny they can to make up for their short comings.

Good posting, Nicky. As a Colorado affiliate who just lost about 20% of his business income I can only confirm that you need to get involved. Write to the lawmakers and testify, too (I did).

But also work on a plan B because it really sucks to find replacement products in some niches. That’s the beauty of Amazon – so many small niches that you can serve, but it kicks you in the rear, when your Amazon account is terminated. Also, be prepared for a lot of work if you use those WordPress plugins for Amazon. And you still take a hit even with plan B in place … just not as bad as if you have nothing ready.

And the last advice – diversify, diversify, diversify ….

Now if I would just not suck at PPC so bad, things would be really good.

Damn man – this makes me think "do we need to start killing our affiliate programs?" Amazon is setting an example to others who have affiliate programs, and even if we don't want to follow that example, it makes us question whether it is worth the risk.

I live in NY, I buy from Amazon and they DO charge me NYS sales tax and I am not an affiliate.

I read the comment from Kenny and Sonny, but it doesn’t work. I’m going through it right now with my lawyer. Believe me NY is unfriendly to business and are looking to cash in on everything.

I formed both an LLC and corporation in Delaware and only falling out of bed is easier. NY wants me to get permission to use certain words in my business entity, I have to file with other state agencies, I have to pay $1600, just to run ads in 2 papers announcing I am forming a business!

My company is registered in Delaware, but NY Banks won’t let me open an account despite have a certificate of good standing issued by the Delaware Secretary of State. I have to have a physical presence in Delaware to open an account.

Otherwise I have to pay a company do open an account for me…and their fees are high. They are really in business to milk overseas individuals who want a bank account in the US.

The other thing is income tax. NYS has some pretty high fines and penalties if you 1. operate as a foreign entity in NY without permission 2. If live in NY and don’t report your income..believe me you are screwed!

You guys can see the can of worms here because 1099s are being filed with the feds.

The sorry fact is nobody in government understands ecommerce and we have no champions to renact the kind of legislation that will make things work right. We’ll suffer all these ad hoc, knee-jerk legislative sales tax efforts until we do.

States squandered their surpluses just like the Feds did and now we have government vampires sucking us dry on either side of our necks…and they’re not going to leave the cash cow they believe Internet marketing is alone.

Whoops, it may not matter, but I got so hot thinking of the all the hoops I have to jump through that I may not have been clear ..just to clarify.

I can not open a bank account in NY without registering my businesses with the NYS Secretary of State. I live in NY so they consider me having a nexus here, even though I am an affiliate and have no merchandise, my servers are in Nevada, and my Domain Names are registered in Arizona.

I guess it is because my computer is in NY:)

I can not open a bank account in Delaware without me having a physical presence there. If I want a Delaware bank account, there are services that will do it for me for a fee. I checked a couple of services but their fees were astronomical (for me).

Maybe I didn’t need to clarify but this is a great discussion to be having. Maybe somebody else has a solution I haven’t thought about.

Good to know about. I am a little glad to see that MA hasn’t had recent activity but I know the state wants a piece of the on-line action in the form taxes. Always kind of think it’s inevitable that soon enough we’ll see a ‘national tax’ law that enforces a tax in all states for on-line businesses.

I didn't get to read through all of the other comments, but I do have to say that states are discriminating against online retailers with these types of laws.

My day job is working for a distributor that sells items to manufacturers in our state.

When a customer from our territory calls one of the companies that our company reps we receive a commission. Our industry is a little behind the curve when it comes to doing business online, I can be fairly safe in saying that there are not any online affiliates involved.

The flaw here is if online retailers are required to collect taxes because of their affiliates in a particular state, then companies with traditional distributors in a state should also be required to collect tax. In the case of our company we are not employed by the company we rep so therefore the company we rep is not required to collect sales tax in our state. That is unless they have an office, employee, warehouse, or anything else giving them "nexus" here.

Any idea why other retailers and CPA networks with CPS offers don't kick out all NY affiliates? Is Amazon the only one who cares about this, seems like all affiliates in NY who run a CPS offer would be affected.

To me this would mean if your an affiliate in NY and run a rebill offer the network/advertiser should not let you run it unless they are going collect the sales tax on that sale.

well said – They passed the same shit in north carolina and its going to cost me over 1k to register a company in nevada just because of this crap.

This is some serious shit.. but affiliate companies need to band together or they are going to get fucked. They need to take a page out of payday loans lobbying in washington. They really proctect their industry and i wish the affiliate industry would do the same.

Great post on the issue. So many affiliates live in their own little worlds but if we all don’t wake up and act on this we will see more and more states passing these laws and more companies shutting down their affiliate programs in those states.